"Boeing's defense business is dead!"
"No, it's alive!"
I swear, the off-again, on-again saga of Boeing (NYSE:BA) and its military aircraft division has more twists and turns than an episode of The Walking Dead. But could it be that at long last, Boeing has decided to let its defense business rest in peace?
Boeing calls it quits...
It almost sounds like it. Earlier this month, The Wall Street Journal ran a story outlining the troubles Boeing has encountered trying to sell fourth-generation fighter jets in a world that has moved on to Gen 5 -- and what Boeing plans to do about it.
Last year, Boeing delivered 47 F-15 and F/A-18 fighter jets to its customers around the globe, down from 58 in 2014 and 62 in 2013. Aside from U.S. military purchases -- a military seemingly hell-bent on converting all of its fighter squadrons to Lockheed Martin's (NYSE:LMT) F-35 -- it's hard to even remember the last time Boeing won a really big sales contract for its marquee fighter jets.
And Boeing realizes this.
Making money in the aftermarket
Calling herself a "realist," 28-year Boeing veteran and new head of Boeing defense Leanne Caret told the Journal she is fully aware that the fighter-jet biz isn't what it used to be. But much like a car dealership that sells jalopies at breakeven and then earns its profits changing oil and tuning up engines, Caret believes that Boeing Defense can still do plenty of good business in the aftermarket.
She calls this "evolving what the fighter business means to us." And basically, what that means is that even if isn't successful selling brand-new fighter jets, it can still service and upgrade old ones. After all, at last report Boeing's F-15 Eagle fighter jet was still the No. 4 best-selling fighter jet in the world, and Boeing's F/A-18 is No. 2. Combined, there are roughly 1,900 F-15s and F/A-18s in service around the world today.
That's 1,900 planes that need to be serviced and have worn-out parts replaced. And a good percentage of these planes are presumably older models, which can spawn lucrative upgrades to configurations that are standard for newer-model variants.
Money in the sales department, too
Meanwhile, Caret sees plenty of opportunity for Boeing to zig when Lockheed Martin zags -- if Lockheed has locked up the new fighter jets market, well and good. Boeing can just sell non-fighter-jet military aircraft instead. KC-46 Pegasi, C-17 Globemasters, P-8A Poseidons, and new variants yet to be designed can all provide extra income for Boeing from sales today, and, yes, maintenance and upgrades tomorrow as well.
Between sales of non-fighter-jet military aircraft (including helicopters), maintenance and upgrades work on all its aircraft, and new work building drones, spacecraft, and satellites, Caret sees a worst-case scenario of Boeing Defense shrinking to $25 billion annual revenue in size.
Granted, that's not good news -- Boeing did more than $30 billion in defense business last year. We could be talking about a potential 18% drop in revenue from a very high-margin business, which would obviously not be good for Boeing stock. But this is still a far cry from being forced out of the defense business entirely.
Despite what the stock's detractors might say, there's more to the defense business than just fighter jets.
Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 278 out of more than 75,000 rated members.
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